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Netflix stumbles on profit, but subscriber base swells to nearly 70 million

Netflix stumbles on profit, but subscriber base swells to nearly 70 million


International expansion and rising content costs are putting a squeeze on its profit margins

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Netflix is one of the best performing stocks in the S&P 500 right now, up around 500 percent over the last five years and about 100 percent in the last year alone. That momentum comes from steady subscriber growth, both in the US, and abroad, along with the broader recognition that viewing is moving to online and on demand, away from traditional network and cable television. Netflix has also had major success with original content, winning numerous awards and injecting itself into the center of pop culture discussions.

Today the company announced its third quarter earnings, reporting $1.74 billion in revenue and $74 million in profit, down from $110 million in profit for the same period last year. It added 3.62 million new subscribers — 0.88 million domestically and 2.74 million internationally. That gives it 69.17 million subscribers globally. Financial analysts had predicted the stock would post revenue of $1.75 billion and earnings of 12 cents a share, and it missed slightly on both those marks. It's overall subscriber growth was higher than Netflix had projected, although growth in the US came in lower than expected.

Part of the squeeze on profits comes from international expansion, an area that Netflix has repeatedly said will be a drag on earnings for some time to come. "As we have indicated previously, international contribution losses will grow sequentially in Q4 as we launch Spain, Italy and Portugal," founder and CEO Reed Hastings wrote in a letter to investors. "We have announced our expansion to South Korea, Hong Kong, Taiwan and Singapore in early 2016. Our plan remains to run around break-even through 2016 and to deliver material profits thereafter.

Just last week Netflix raised the price of its basic subscription from $8.99 to $9.99, saying that the increase was necessary to keep up with the rising cost of content. Two months ago, it decided not to renew its licensing deal with Epix, a move that meant blockbuster titles like The Hunger Games: Catching Fire, World War Z, and Transformers: Age of Extinction would no longer be available on the service. A very sweet deal with Disney does begin in 2016, however, bringing films from Lucas Arts, Pixar, and Marvel to Netflix.

"Last month, we did not renew our deal to carry movies from EPIX, as the films were non-exclusive, US-only and offered in windows even further behind other premium Pay TV outlets," Hastings wrote in a letter to investors. "So far, we’ve seen no material reduction in US feature film viewing as we have so many other films for members to enjoy."